Discussion
of Issues
Issue 1:
Is SJNG’s projected test period of the twelve months
ending December 31, 2024, appropriate?
Recommendation:
Yes, SJNG’s projected test period of the twelve
months ending December 31, 2024, is appropriate. (Kunkler)
Staff Analysis:
In general, a projected test year methodology uses
forecasted data for a 12-month period to match revenues and expenses with rate
base investment. SJNG proposed the year ending December 31, 2024 as its test
year for this docket, stating that it will “best reflect the Company's on-going
operations with respect to customer base, investment requirements, throughput
levels and overall cost of service at the time that the rates set in this
proceeding will be in effect.”
Staff believes that the 12-month period ending December
31, 2024, is a reasonable period for assessing SJNG’s financial and operational
performance, allowing for a thorough evaluation of revenues, expenses, and rate
base investment. Further, staff notes this proposed test period allows for
projections that reflect current trends and anticipated future conditions,
making it a sound period for regulatory and financial planning.
Staff believes that SJNG’s proposed 2024 test year
provides a balanced approach that accounts for the evolving needs of the Company
and its customers, while maintaining regulatory efficiency and transparency.
Therefore, staff recommends that the projected test period of the 12 months
ending December 31, 2024, is appropriate.
CONCLUSION
Staff recommends that SJNG’s projected test period of the
twelve months ending December 31, 2024, is appropriate.
Issue 2:
Should the Commission approve SJNG’s forecasts of
customers and therms by rate class for the projected test year ending December
31, 2024? If not, what adjustments should be made?
Recommendation:
The Commission should approve SJNG’s forecasts of
customers and therms by rate class for the projected test year ending December
31, 2024 with two exceptions: (1) the test year sales projections for the GS-4
rate class should be increased by 42,391 therms, and (2) the test year sales
projections for the FTS-4 rate class should be decreased by 2,694 therms.
(Kunkler)
Staff Analysis:
SJNG prepared its forecasts for the projected test
year, for both customer counts and therm usage, utilizing historical data
trends to develop its projections. As detailed in its MFRs, SJNG projected its
customer count to increase by 7.1 percent to 3,412 customers, and its therm
sales to increase by 5.5 percent to 1,103,398 therms in the 2024 test year.
In October 2018, SJNG suffered a significant loss of its
customer base due to the effects of Hurricane Michael. In the years since (2019-2023), SJNG has
experienced relatively steady recovery growth.
In those years, the Company’s average annual customer growth was
approximately 6.0 percent. Staff believes this average increase when compared
to SJNG’s projected customer count increase of 7.1 percent for the test year is
reasonable.
Similarly, in the same years since Hurricane Michael, the
Company experienced average annual therm sales growth of approximately 11.5
percent. While the Company’s forecast of
5.5 percent therm sales growth for the test year may appear low, staff believes
the average therm sales for the post-Hurricane Michael years is skewed due to
significant therm sales increases in 2020 and 2021. Sales growth for the
Company has slowed considerably in each year since 2021.
Staff has reviewed SJNG’s customer count and therm sales projections
at each customer class level for the 2024 test year. Staff believes the
Company’s customer and therm sales projections for each customer class are
reasonable with the exception of the therm sales projection for one customer
class, the GS-4 rate class. As discussed in more detail below, this rate class
includes Sacred Heart Hospital and the Gulf Correctional Institute (GCI). As
SJNG explained, therm sales to GCI under the GC-4 rate class only occur during
months when GCI experiences higher demand than is allowed under its contract
with its gas vendor.
SJNG explained that GCI has a contractual agreement with
Gas South. This gas is provided over SJNG’s distribution system. GCI was
included in the Company’s filing as a customer, and listed in the FTS-4 rate
class, which is the Company’s lone transportation service rate class.
Staff noted that, as of August 30, 2024, SJNG’s GS-4
customer class had already exceeded the Company’s annual therm projection for
that class. SJNG explained that when GCI
requires more gas than scheduled from Gas South, SJNG will supply its system
gas as needed to GCI and bill this additional system gas under the GS-4
customer class. Since this “additional” gas is unscheduled, and according to
SJNG “without notice,” no additional therm sales for GCI were included in
Company’s forecast of therm sales for the GS-4 rate class for the test year. SJNG
acknowledged that it has supplied 44,203 therms of system gas to GCI in 2024 as
of September 30, 2024.
Based on the updated information from the Company, staff
believes that SJNG’s determination to not recognize these additional therm
sales to GCI in its original filing will result in an underestimated revenue
forecast at current rates and potentially distort the Company’s revenue
requirement percentage increase amount. An under-forecast of test year revenue at
current rates, if not corrected, can be expected to impact the proposed test
year percentage increase in revenues and ultimately customer rates.
Staff believes an adjustment to SJNG’s therm sales will
not only provide a more accurate representation of total therm sales and
revenue for the test year, but also prevent SJNG’s customers from paying higher
rates that may result from the under-forecasting of GS-4 therm sales. On October 21, 2024, SJNG provided an updated
2024 Test Year therm sales forecast for both the GS-4 and FTS-4 rate classes
that properly accounts for the excess therm sales to GCI.
Staff has reviewed the updated forecasts for the GS-4 and
FTS-4 rate classes provided by SJNG and believe them to be a more accurate
projection of the projected test year sales that the Company will actually
realize. The updated therm sales information
results in a 42,391 increase to the projected test year therm sales for the
GS-4 rate class and a 2,694 reduction to the projected test year FTS-4 rate
class.
CONCLUSION
The Commission should approve SJNG’s forecasts of
customers and therms by rate class for the projected test year ending December
31, 2024 with two exceptions: (1) the projected test year sales projections for
the GS-4 rate class should be increased by 42,391 therms, and (2) the FTS-4
rate class sales should be decreased by 2,694 therms.
Issue 3:
Are SJNG’s estimated revenues from sales of gas by
rate class at present rates for the projected test year appropriate? If not,
what adjustments should be made?
Recommendation:
No. SJNG’s estimated revenues from sales of gas by
rate class at present rates for the projected test year are underestimated for
the GS-4 rate class and overestimated for the FTS-4 rate class. SJNG’s estimated revenues from the sales of
gas for all other rate classes are appropriate. The Company’s GS-4 rate class
test year revenues should be increased by $6,715 and the FTS-4 rate class
revenues should be decreased by $427, resulting in a net $6,288 increase to
SJNG’s estimated test year revenues from sales of gas at present rates.
(Kunkler)
Staff Analysis:
This issue addresses whether SJNG’s estimated
revenues from sales of gas by rate class at present rates for the projected
test year is appropriate. As explained in Issue 2, SJNG provided forecasted
customer counts and therm sales for all of the Company’s rate classes for the
2024 test year. Once the forecasted customer counts and therm sales are
established, they are multiplied by the Company’s respective current rates for
each customer class and summed to yield total revenues from the sale of gas.
Staff confirmed that SJNG used the correct current rates
for all customer classes in its calculations of test year revenue. However, as
discussed in Issue 2, staff believes SJNG’s therm sales forecasts for the GS-4
and FTS-4 rate classes should be adjusted to reflect more accurate and updated
year-to-date sales data.
Table 3-1
2024 Test Year Revenues from
Sales of Gas: GS-4 and FTS-4 Rate Classes
|
|
SJNG Proposed
|
Staff Proposed
|
Difference
|
|
GS-4 Therm Sales
|
108,755
|
151,146
|
42,391
|
|
Current Rate (per therm)
|
$0.15840
|
$0.15840
|
-
|
|
|
|
|
|
|
Energy Charge Revenue
|
$17,227
|
$23,942
|
$6,715
|
|
|
|
|
|
|
FTS-4 Therm Sales
|
127,567
|
124,873
|
(2,694)
|
|
Current Rate (per therm)
|
$0.15840
|
$0.15840
|
-
|
|
Energy Charge Revenue
|
$20,207
|
$19,780
|
($447)
|
Source: SJNG MFR Schedule E-2, page 1 of 2; DN 09805-2024
If the Commission approves staff’s recommendation in Issue
2, SJNG’s test year revenues from sales of gas at present rates should be
increased from $1,401,291 to $1,407,579, an increase of $6,288.
CONCLUSION
SJNG’s estimated revenues from sales of gas by rate class
at present rates for the projected test year are underestimated for the GS-4
and overestimated for the FTS-4 rate classes.
SJNG’s estimated revenues from the sales of gas for all other rate
classes are appropriate. The Company’s GS-4 rate class test year revenues
should be increased by $6,715 and the FTS-4 rate class revenues should be
decreased by $427, resulting in a net $6,288 increase to SJNG’s estimated test
year revenues from sales of gas at present rates.
Issue 4:
Is the quality of service provided by SJNG adequate?
Recommendation:
Yes. SJNG’s quality of service is adequate. (Lewis)
Staff Analysis:
Pursuant to Section 366.041, F.S., in fixing rates,
the Commission is authorized to give consideration, among other things, to the
efficiency, sufficiency, and adequacy of the facilities provided and the
services rendered. As part of its review, Commission staff held a virtual
customer meeting on September 4, 2024. The purpose of the meeting was to gather
information regarding customer concerns about SJNG’s quality of service and its
request for a rate increase. No customers participated in the meeting, and no
customer comments were filed in the docket. SJNG serves approximately 3,186 customers.
A review of the Commission’s Consumer Activity Tracking
System indicated that there were nine complaints received from January 1, 2019,
through October 28, 2024. Of the nine complaints, there were six complaints
pertaining to billing and three complaints regarding improper disconnects.
There was one apparent rule violation identified by staff that occurred in
August 2023. A proper disconnect notice was not sent to the customer, resulting
in the interruption of service for one day. The Company apologized to the
customer and restored service.
Pursuant to Rule 25-7.018, F.A.C., each gas utility shall
keep a complete record of all interruptions affecting the lesser of 10 percent
or 500 or more of its division meters. Based on the Company’s filing, there
were no customer interruptions affecting either 10 percent or 500 meters during
the historic 2023 test year.
CONCLUSION
Based on a review of the information discussed above,
staff recommends that SJNG’s quality of service is adequate.
Issue 5:
Should the depreciation rates approved in SJNG’s
last depreciation study by Order No. PSC-2023-0215-PAA-GU, issued July 26,
2023, be used in this docket for calculating the projected test year’s
depreciation expense?
Recommendation:
Yes, the depreciation rates approved in SJNG’s last
depreciation study and appearing in Order No. PSC-2023-0215-PAA-GU, issued July
26, 2023, should be used for calculating the projected test year’s depreciation
expense. (Kunkler)
Staff Analysis:
Depreciation is a significant component of a
utility’s cost, and an accurate calculation of depreciation expense is critical
for projecting a utility’s total expenses for the test year. Utilizing the most
current depreciation rates allow for a utility to closely align its financial
projections with the actual, observed decline in asset value over time,
resulting in the most accurate estimate of the revenue requirement for the
projected test year.
Pursuant to Rule 25-7.0435(4)(a), F.A.C., SJNG filed its
last depreciation study in January 2023, in Docket No. 20230022-GU. The
depreciation rates were approved by Order No. PSC-2023-0215-PAA-GU in that
docket, and were developed though a detailed analysis of SJNG’s assets and
reflect their most current life and usage patterns. No
new depreciation rates have been approved for this Company since the issuance
of the aforementioned order.
Further, Rule 25-7.0435(2)(a), F.A.C., prescribes that no
utility shall change any existing depreciation rate or initiate any new
depreciation rate without prior Commission approval. Therefore, staff believes
that the depreciation rates approved by Order No. PSC-2023-0215-PAA-GU not only
provide a reliable and accurate basis for determining the test year
depreciation expense and will lead to the most accurate financial projections
for the test year, but are also the rates that are required by the Commission’s
depreciation rule.
CONCLUSION
Staff recommends that the depreciation rates approved in
SJNG’s last depreciation study by Order No. PSC-2023-0215-PAA-GU, issued July
26, 2023, should be used for calculating the projected test year’s depreciation
expense.
Issue 6:
Has SJNG made the proper adjustments to remove all
non-utility activities from the projected test year rate base? If not, what
adjustments should be made?
Recommendation:
No. Plant-in-Service should be decreased by $58,773 and
Accumulated Depreciation increased by $16,080 in the projected test year rate
base related to non-utility activities. (Przygocki)
Staff Analysis:
In Audit Finding No. 8, staff found that adjustments
to Common Plant Allocated and Accumulated Depreciation listed in MFR Schedule
F-1 were incorrect. Staff adjusted Common Plant Allocated from $216,805 to
$275,578 and Accumulated Depreciation from $125,229 to $141,309. Therefore, Plant-in-Service
should be decreased by $58,773 and Accumulated Depreciation should be increased
by $16,080. The Company reviewed this audit finding and agreed with the
adjustments.
CONCLUSION
Plant-in-Service should be decreased by $58,773 and Accumulated
Depreciation increased by $16,080 in the projected test year rate base related
to non-utility activities.
Issue 7:
What level of projected test year Plant-in-Service
should be approved?
Recommendation:
The appropriate amount of Plant-in-Service for the
projected test year is $9,431,217. Staff recommends a reduction to the 13-month
average Plant-in-Service of $59,800 associated with SJNG’s 2024 plant additions.
Staff also recommends that SJNG provide the Commission a written update on the
purchase status of the trucks within one calendar year of the issuance of the
final order in this proceeding. (Lewis, Przygocki)
Staff Analysis:
SJNG filed Plant-in-Service of $9,549,790. Based on
the adjustment from Issue 6, staff reduced Plant-in-Service by $58,773. Additional
adjustments to the Company’s requested plant additions in the projected test
year are necessary.
Requested Plant Additions
As discussed in the direct testimony of Andy Shoaf, SJNG
requested cost recovery for two capital projects, as well as two vehicles,
power operated equipment, and two office computers. Staff’s total recommended
cost for plant additions is $340,045, which represents a reduction of $176,693.
The reduction to the 13-month average Plant-in-Service balance in the projected
test year is $59,800. The requested plant additions, amounts, staff’s
recommendations, and adjustments to the Company’s MFRs are discussed below.
Encoder Receiver Transmitters (ERTs)
SJNG is in the process of replacing ERTs, which are used
for the automatic meter reading of gas meters. SJNG began deploying the ITron
100-G ERT system approximately 13 years ago. SJNG’s existing ERTs need to be
replaced due to battery failure. The Company most recently replaced 200 meters
in January 2023 at a cost of $16,214 ($81.07 each). As part of this rate case,
the Company requested cost recovery for the 3,000 residential meters remaining
to be replaced and indicated that it anticipates these replacements would be
completed over the next three years at a cost of $333,254. However, SJNG stated
that it has been unable to purchase the remaining ERTs due to back order
issues. While staff does not dispute the need for the ERTs, there is no
certainty as to when SJNG will obtain the replacement ERTs and it would not be
appropriate for SJNG to recover costs for a plant addition that does not have
an anticipated in-service date. Due to the uncertainty of SJNG’s ability to
obtain the ERTs, staff does not recommend approval of this plant addition at
this time. The Company may petition the Commission to recover the costs of the
remaining meters once they have been acquired.
Trucks
SJNG requested two trucks, a regular cab and a crew cab,
as replacements for existing vehicles. The vehicles being replaced are the
oldest in its fleet with the highest mileage. These trucks were purchased more
than 5 years ago and maintenance costs are increasing due to age and usage.
SJNG stated that the new standard cab truck is used as a service vehicle, and
the crew cab is used by the Company’s Operation Manager to inspect the
distribution system. System inspections require a four-wheel drive vehicle in
order to access remote areas of the system. The crew cab is also used to
transport multiple employees to job sites. The Company explained that all of
its service and manager vehicles are set up the same way in order to have all
necessary equipment to perform duties and protect the trucks from wear and
tear. This includes: added toolboxes, toroidal propane tanks and conversion
kits, vinyl wraps with the Company’s name, and bed liners. The toroidal tanks
are used to convert the trucks to run on propane, which saves SJNG fuel costs
for these vehicles. SJNG included $127,988 in its MFRs to reflect the purchase
of the two trucks. However, in response to staff’s data requests, the Company
provided invoices and quotes, for trucks and accompanying accessories it
purchased in late 2022 and 2023, as examples of costs to be incurred. This
amounted to more than what was originally recorded in the MFRs. Staff
questioned this discrepancy through data requests and SJNG replied that the
estimates included in the MFRs were early projections. Staff does not dispute
SJNG’s need for the truck replacements and believes they are reasonable.
Therefore, staff recommends $144,243 for the purchase of the trucks, toroidal
propane tanks, conversion kits, toolboxes, vinyl wraps, and bed liners. This
represents an increase of $16,255 over the amounts included in SJNG’s MFRs.
However, SJNG has not yet purchased these trucks and indicated it intends to
purchase them once cash flow allows. While staff recommends the purchase of
these trucks and accompanying accessories, staff also recommends that SJNG
provide the Commission a written update on the purchase status of the trucks
within one calendar year of the issuance of the final order to this in this
proceeding.
Tractor
In August 2024, SJNG purchased a new tractor. The Company
also purchased various accessory components such as a backhoe, front loader,
and a trailer for hauling the tractor to worksites. SJNG explained that this
tractor is used to maintain more than 22 miles of right-of-way in its service
territory. SJNG’s previous tractor was in disrepair, requiring $17,750 of
engine repairs. Based on provided invoices, SJNG purchased the new tractor and
its accessories for $77,600. At the time of purchase, SJNG received $20,000 as
the trade-in value for the old tractor. In addition, SJNG stated that 25
percent of the tractor should be allocated to its non-utility business. Based
on the above information, staff believes this is a necessary replacement.
Therefore, staff recommends $58,200 for the tractor and accessories. This
represents an increase of $10,500 to the Company’s MFRs. However, staff also
recommends an adjustment be made to the Company’s depreciation reserve by
adding $15,000 ($20,000 x 75 percent) to reflect the trade-in of the old
tractor. Therefore, the overall rate base affect would be a reduction of $4,500.
Computers
In its filing, SJNG requested $7,796 for two desktop
computers, which were purchased in July 2024. These computers are replacements
for older computers that were starting to show their age in terms of their
operating systems’ speed. Based on a paid invoice submitted by SJNG, the total
cost for the two Dell OptiPlex 7000-ST computers was $2,520 ($1,255 each),
which is $5,276 less than SJNG’s original filing. Staff believes that this
request is reasonable and recommends $2,520 for recovery of the costs of these computers.
City Gate Replacement
SJNG’s 2024 capital plan included replacing its primary
City Gate Receipt Point (the point where the Company receives gas from the
transmission system) to include a check meter for comparison of delivered
volumes of gas from its supplier, Florida Gas Transmission Company (FGT). SJNG
requested a check meter be included as part of this project due to recent
billing issues with FGT. FGT’s meter is currently the only meter at SJNG’s
receipt point from the FGT pipeline and installing this check meter would avoid
any potential billing issues in the future. SJNG’s obtained quote included the
purchase of an assembly to allow for remote monitoring. The contracted cost to
build the new meter station and install the new check meter is $81,411. The
meter and accompanying components were purchased for $34,439. This project also
required an estimated $15,233 of preparatory site work and an additional $4,000
for a contractor to keep the site drained during the four-day installation.
SJNG stated that it expects to have the city gate replacement completed by
December 2024.
Despite the fact that witness Andy Shoaf included the need
for the City Gate replacement in his testimony, no estimates for the project
were included in the Company’s MFRs. This is because the MFRs were prepared
prior to the testimony and prior to SJNG finding a reasonable bid from a
contractor to complete the work. Due to heightened concerns regarding FGT’s
measuring capabilities, the Company felt it necessary to request this project
in the instant case. Staff agrees this is a valid concern and SJNG’s request is
reasonable. Therefore, based on the estimates and invoices provided by the
SJNG, staff recommends that the total cost of the project is $135,083.
Summary
In total, SJNG’s requested 2024 plant additions should be
decreased by $176,693. The Commission should approve an adjusted amount of
$340,045 for SJNG’s 2024 plant additions. The resulting reduction to the
13-month average Plant-in-Service balance in the projected test year is $59,800.
Staff also recommends that SJNG provide the Commission a written update on the
purchase status of the trucks within one calendar year of the subsequent Order
to this recommendation.
CONCLUSION
The appropriate amount of Plant-in-Service for the
projected test year is $9,431,217. Staff recommends a reduction to the 13-month
average Plant-in-Service of $59,800 associated with SJNG’s 2024 plant
additions. Staff also recommends that SJNG provide the Commission a written
update on the purchase status of the trucks within one calendar year of the
issuance of the final order to this in this proceeding.
Issue 8:
What level of projected test year Accumulated
Depreciation should be approved?
Recommendation:
Staff recommends an Accumulated Depreciation balance
of $6,254,754 for the projected test year. Staff recommends increasing
Accumulated Depreciation by $11,930. (Przygocki, Kunkler)
Staff Analysis:
SJNG’s original filing reflected a projected test year
Accumulated Depreciation balance of $6,242,825. In addition to the adjustment
discussed in Issue 6 and corresponding adjustments from the Plant-in-Service
adjustments in Issue 7, there is one additional audit finding addressing
Accumulated Depreciation.
As reflected in Audit Finding No. 4, the wrong
depreciation rate was applied to Account 390. The Company used 1.8 percent,
whereas the Commission-approved rate is 2.2 percent. Audit staff noted that
23.93 percent of Account 390 was allocated to the Company’s non-regulated
operations. The Accumulated Depreciation for Account 390 should be increased by
$357 and the allocated Accumulated Depreciation for Account 390 should be
increased by $86.
CONCLUSION
Based on the above adjustments and previous issues, staff
recommends increasing Accumulated Depreciation by $11,930. Staff, therefore,
recommends an Accumulated Depreciation balance of $6,254,754.
Issue 9:
What level of projected test year Construction Work
in Progress (CWIP) should be approved?
Recommendation:
The level of projected test year CWIP that should be
approved is $0. (Przygocki)
Staff Analysis:
On MFR Schedule G-1, page 1, the Company reflects a
projected test year balance of CWIP to be $0. Staff does not recommend any
adjustments.
Issue 10:
What level of projected test year Working Capital
should be approved?
Recommendation:
The amount of projected test year Working Capital should
be $74,822. (Przygocki)
Staff Analysis:
On MFR Schedule G-1, page 1, the Company reflected a
projected test year balance of Working Capital of $74,822. Staff reviewed the
levels of the components, including a cash balance of $126,764, non-utility
adjustments, and verified that SJNG did not include unamortized rate case
expense in Working Capital for the projected test year. Staff has no reductions
to Working Capital.
CONCLUSION
As such, staff does not recommend any adjustments. The
amount of projected test year Working Capital should be $74,822.
Issue 11:
What level of projected test year rate base should
be approved?
Recommendation:
The level of projected test year rate base that should
be approved is $3,251,285. (Przygocki)
Staff Analysis:
This is a fallout issue. SJNG reflected a projected
test year rate base of $3,381,787. Based on the adjustments in Issues 6, 7, and
8, staff recommends reducing rate base by $130,502. As such, staff recommends a
projected test year rate base of $3,251,285.
CONCLUSION
The level of projected test year rate base that should be approved
is $3,251,285.
Issue 12:
What amount of projected accumulated deferred taxes should
be approved for the projected test year capital structure?
Recommendation:
The amount of accumulated deferred income taxes to
include in the 2024 projected test year capital structure is $602,050. (Ferrer)
Staff Analysis:
SJNG requested a total accumulated deferred income
tax (ADITs) balance of $989,098 be included in the 2024 projected test year
capital structure, which is presented on MFR Schedule G-3, page 2. The Company
filed supplemental MFR Schedules on August 19, 2024 which updated the amount to
$1,235,741. SJNG witness Stitt testified that the appropriate level of deferred
income taxes to be used in the determination of the Company’s capital structure
for the projected test year is $989,098, based on the amount submitted in the original
MFR Schedules. Upon review, staff had concerns about the large amount of ADITs
as compared to the Company’s rate base amount of $3,381,787, which is 36.54
percent of its capital structure. Upon staff’s request, SJNG consulted with its
accountant and determined that the ADIT balance included in its MFR Schedule
reflected the per books total for both the Company’s regulated and non-regulated
businesses. Subsequently, SJNG provided a calculation of the projected 2024
ADIT balance of $626,216 based on the regulated portion of the Company’s ADIT
Balance.
Staff believes the revised amount is more reasonable given the ADIT balance
approved in the Company’s 2008 rate case relative to the 2008 test year capital
structure. After reconciliation of the capital structure to the recommended
rate base amount, the amount of ADITs is $602,050. Accordingly, the amount of
accumulated deferred income taxes to include in the 2024 projected test year
capital structure is $602,050.
CONCLUSION
The amount of accumulated deferred income taxes to include
in the 2024 projected test year capital structure is $602,050.
Issue 13:
What amount and cost rate for customer deposits
should be approved for the projected test year capital structure?
Recommendation:
The amount and cost rate for customer deposits for
the 2024 projected test year capital structure is $50,111 at a cost rate of
2.00 percent. (Quigley)
Staff Analysis:
In its initial filing, SJNG presented its 2024
projected test year capital structure based on a 13-month average reflecting a
customer deposit per book balance of $189,447 at a cost rate of 2.00 percent as
shown on MFR schedule G-3, page 2 of 11, line 4. The Company made a specific
adjustment of $137,325 to remove the customer deposits for the non-regulated
business for an adjusted balance of $52,122.
Staff reviewed Supplemental MFR schedule G-3, page 7 of
11, and confirmed the calculation of interest on customer deposits complies
with the requirements set forth in Rule 25-7.083(6)(a), F.A.C. After
reconciliation of the capital structure to the recommended rate base amount,
the amount of customer deposits is $50,111. Accordingly, staff recommends the
amount and cost rate for customer deposits that should be approved for the 2024
projected test year capital structure is $50,111 at a cost rate of 2.00 percent.
CONCLUSION
The amount and cost rate for customer deposits for the
2024 projected test year capital structure is $50,111 at a cost rate of 2.00
percent.
Issue 14:
What amount and cost rate of long-term debt should
be approved for inclusion in the projected test year capital structure?
Recommendation:
An amount of $883,741 for long-term debt at a cost
rate of 8.36 percent should be approved for inclusion in the projected test
year capital structure. (McGowan)
Staff Analysis:
In its initial filing, SJNG presented its 2024
projected test year capital structure based on a 13-month average consisting of
long-term debt in the adjusted amount of $335,752 at a cost rate of 8.50
percent as reflected on MFR Schedule G-3, page 2 of 11. The Company filed
supplemental MFR Schedules on August 19, 2024, which updated the amount to
$302,639. SJNG witness Stitt affirmed that the Company is forecasting the
capital budget requirements and some operating requirements will be funded with
debt and all Company debt in the projected test year is anticipated to be
long-term.
On MFR Schedule G-3, page 3 of 11, the Company calculated
an embedded cost of long-term debt of 7.95 percent. This cost rate was based on
dated interest rates. The long-term debt consisted of four debt issuances. Two
of the loans are from the Shoaf Family Trust and the Costin Family Trust in the
amounts of $150,000 each, at a cost rate of 6.50 percent, and included maturity
dates of December 31, 2023. The other two loans are projected loans from
Centennial Bank in the amounts of $500,000 and $300,000. SJNG’s President,
Stuart Shoaf, testified the projected cost rate of long-term debt for the
Centennial Bank Loans was based on conversations with local lending
institutions and the actual 8.50 percent interest rate for a loan the Company
recently obtained from Centennial Bank on February 9, 2024, for non-utility
purposes.
Staff confirmed the cost rate of 8.50 percent is reflected in the loan
agreement and believes it is reasonable based on the current prime rate of 7.75
percent.
Regarding the loans from the Shoaf Family Trust and Costin
Family Trust, SJNG explained the Company was unable to pay off the loans at
maturity and the lenders renewed the loans in April 2024 at an interest rate of
8.00 percent. Given the documentation and information provided by the Company,
and after recalculating the interest for the renewed loans, the proper cost
rate for long-term debt is 8.36 percent for the projected test year. In Issue
15, staff recommends that the equity ratio be capped at 60.00 percent which
increases the long-term debt balance to $919,213. After reconciliation of the
capital structure to the recommended rate base amount, the amount of long-term
debt is $883,741.
CONCLUSION
An amount of $883,741 for long-term debt at a cost rate of
8.36 percent should be approved for inclusion in the projected test year
capital structure.
Issue 15:
What equity ratio should be approved for the
projected test year capital structure?
Recommendation:
An equity ratio of 60.00 percent, based on investor
sources, should be approved for the projected test year capital structure. (D. Buys)
Staff Analysis:
In its filing, SJNG requested an equity ratio of 82.00
percent, based on investor sources. In SJNG’s last rate case in 2008, the
Commission capped the Company’s equity ratio at 60.00 percent, reducing SJNG’s
requested equity ratio of 84.40 percent. In its Order, the Commission expressed
its concern that SJNG was not using lower cost debt to leverage its operations
and minimize its overall cost of capital. The
Commission also found that allowing SJNG an equity ratio that is greater than
the average equity ratio maintained by other natural gas distribution companies
offsets the business risks facing a small, privately held utility that is
exposed to the financial and business risks discussed in Issue 16. The equity
ratios of the four other natural gas companies in Florida are summarized in
Table 15-1.
Table 15-1
Natural Gas Company Equity
Ratio
|
Natural Gas Company
|
Equity Ratio
|
|
Peoples Gas System, Inc.
|
54.70%
|
|
Florida City Gas
|
59.60%
|
|
Florida Public Utilities Co.
|
55.10%
|
|
Sebring Gas System, Inc.
|
38.43%
|
|
AVERAGE
|
51.96%
|
Source: Staff Analysis
The authorized equity ratios of the Florida natural gas
utilities reflect the actual capitalization of the companies, and average 52.00
percent. Capping the equity ratio at 60.00 percent is greater than the equity
ratio of the four Florida natural gas companies and would help offset SJNG’s
business risks as compared to the other natural gas companies. This adjustment
is consistent with the decision in SJNG’s last two rate cases in 2008
and 2001. Therefore,
staff believes an equity ratio of 60.00 percent is reasonable and recommends an
equity ratio of 60.00 percent, based on investor sources, should be approved
for the projected test year capital structure. The amount of equity that should
be included in thhe projected test year capital structure is $1,325,612.
CONCLUSION
An equity ratio of 60.00 percent, based on investor
sources, should be approved for the projected test year capital structure.
Issue 16:
What return on equity (ROE) should be approved for
establishing SJNG’s projected test year revenue requirement?
Recommendation:
An authorized ROE of 10.50 percent, with a range of
plus or minus 100 basis points, should be approved for establishing SJNG’s
projected test year revenue requirement. (D. Buys)
Staff Analysis:
SJNG’s currently authorized return on equity (ROE)
of 11.00 percent was last established in 2008 by Order No. PSC-08-0436-PAA-GU.
In its petition, SJNG requested the Commission maintain this same return on
common equity for purposes of this proceeding. The Company did not file
traditional cost of capital testimony with its petition in this case, citing
the high cost of retaining an expert cost of capital witness, and that using
the typical cost of equity analyses using financial models is problematic for a
Company as small as SJNG. Instead, the Company submitted pre-filed testimony on
what it believes is the appropriate cost rate for common equity. In his
testimony, witness Stuart Shoaf, President of SJNG, recommended the Commission
set SJNG’s ROE based on an assessment of the Company’s business risk, financial
risk, and comparability with other similarly-situated natural gas utilities
operating in Florida. Witness Shoaf also requested the Commission set rates in
this proceeding that would allow the Company an opportunity to earn a return on
its investment consistent with the standards established by the U.S. Supreme
Court decisions in the Hope and Bluefield cases.
Those standards are summarized as follows: (1) the rate of return for a public
utility should be similar to the returns of other financially sound businesses
with comparable risk profiles, (2) the rate of return should be adequate to
assure confidence in the financial integrity of the utility, and (3) the rate
of return should be sufficient to support the credit requirements of the
utility and enable it to attract the capital, at reasonable costs, needed to
provide adequate and reliable service to
consumers.
SJNG’s President provided a general assessment of the
Company’s business risk factors. He explained that SJNG is an extremely small
company compared to the other regulated natural gas distribution companies
operating in Florida. A smaller company is more susceptible to a slow down in
the economy, increased operating expenses, and declining gas consumption. Also,
natural gas is not a monopoly fuel and all natural gas customers have fuel
alternatives, including electric and propane. In addition, SJNG is dependent on
a single large volume transportation customer, Gulf Correctional Institute, for
10 percent of its throughput and sales. In SJNG’s last rate case, the Company
indicated 80 percent of its total sales were for two industrial customers, Gulf
Correctional Institution and Arizona Chemical. Since the last rate case,
Arizona Chemical closed its operations in 2009, and consequently, SJNG saw an
annual revenue shortfall of just under $300,000. Additionally, in October 2018,
Hurricane Michael targeted the heart of SJNG’s service territory causing
catastrophic damage to the Company’s natural gas distribution system and the
homes and businesses of its customers. Many of the customers rebuilt homes with
more efficient gas or all electric appliances that reduced the amount of gas
consumed. Witness Shoaf contended, and staff is pursuaded, that SJNG is exposed
to greater business risk than the average natural gas distribution company in
Florida.
Regarding financial risk, the Company has requested a
capital structure containing an equity ratio as a percentage of investor
supplied capital of 82.00 percent. In Issue 15, staff recommends that the
Commission cap the equity ratio at 60.00 percent, based on investor sources.
This level of equity capitalization is greater than the relative level of
equity capital maintained by all four of the other Florida natural gas
distribution companies. Normally, a company with a higher equity ratio is
exposed to less financial risk than a comparable company with a lower equity
ratio. In this case, even when capped at 60.00 percent SJNG has a comparably
higher equity ratio than the average natural gas distribution company in
Florida.
As pointed out in witness Shoaf’s testimony, Sebring Gas
System, Inc. (Sebring) is the most comparable to SJNG due to its size and
business risks. However, Sebring’s ROE of 11.00 percent was set based on an
investor supplied equity ratio of 38.43 percent, which is less than half that
of SJNG’s actual equity ratio of 82.00 percent. Even with an imputed equity
ratio of 60.00 percent, SJNG has significantly less financial risk than
Sebring. Accordingly, the authorized ROE should reflect SJNG’s low financial
risk as compared to the other Florida natural gas distribution companies.
The table below summarizes the equity ratio, authorized
ROE, WACC, and rate base as of June 30, 2024, of the five natural gas
distribution companies in Florida. As
shown in Table 16-1, SJNG currently has the lowest WACC of all the Florida gas
companies. In Issue 17, staff recommends a WACC of 6.58 percent based on an
equity ratio of 60.00 percent and an ROE of 10.50 percent. This capital
structure and resulting WACC would bring SJNG within the range of WACCs
currently authorized by the Commission for the other Florida natural gas
companies.
Table 16-1
Comparable Natural Gas
Companies
|
Company
|
Rate Base
|
Equity Ratio
|
ROE
|
WACC
|
Year Set
|
|
Peoples Gas System, Inc.
|
$2,203,576,000
|
54.70%
|
10.15%
|
7.02%
|
2023
|
|
Florida City Gas
|
$488,147,944
|
59.60%
|
9.50%
|
6.44%
|
2023
|
|
Florida Public Utilities Co.
|
$482,410,455
|
55.10%
|
10.25%
|
5.97%
|
2023
|
|
Sebring Gas System, Inc.
|
$4,464,446
|
38.43%
|
11.00%
|
6.81%
|
2020
|
|
St. Joe Natural Gas Co. Inc.
|
$3,037,553
|
60.00%
|
11.00%
|
5.44%
|
2009
|
Source: Staff Analysis
In addition, the most recent returns on equity authorized
by the Commission for natural gas distribution companies have been similar,
ranging from 9.50 percent to 10.25 percent. The average of the most recent
authorized ROEs for the other natural gas utilities is 10.225 percent,
excluding SJNG. SJNG and Sebring have the highest ROE to reflect their smaller
size and greater exposure to other business risks. Table 16-2 shows the most
recent returns on equity authorized by the Commission for Florida natural gas
distribution companies.
Table 16-2
Commission Orders for
Comparable Natural Gas Companies
|
Company
|
Order Number
|
Issued
|
ROE
|
|
Peoples Gas System, Inc.
|
PSC-2023-0388-FOF-GU
|
December 27, 2023
|
10.15%
|
|
Florida City Gas
|
PSC-2023-0177-FOF-GU
|
June 9, 2023
|
9.50%
|
|
Florida Public Utilities Co.
|
PSC-2023-0103-FOF-GU
|
March 15, 2023
|
10.25%
|
|
Sebring Gas System, Inc.
|
PSC-2020-0047-PAA-GU
|
February 3, 2020
|
11.00%
|
|
St. Joe Natural Gas Co. Inc.
|
PSC-08-0436-PAA-GU
|
July 8, 2009
|
11.00%
|
Source: Staff
Analysis
In addition, at the time of the Commission’s decision in
SJNG’s last rate case in July 2008, the yield on 30-year U.S. Treasury Bonds
was 4.53 percent and is currently 4.49 percent. However, the long-term Baa
corporate bond yield has declined by approximately 135 basis points from around
7.00 percent in July 2008 to 5.64 percent currently. This indicates capital costs
between the two periods have declined slightly which suggests the access to
capital at reasonable terms has remained similar, if not slightly improved.
In SJNG’s last rate case, the Commission authorized an ROE
of 11.00 percent with an equity ratio of 60.00 percent, which equated to a
weighted average cost of equity of 3.65 percent in the Company’s approved
capital structure in the 2008 rate case. Staff’s recommended ROE of 10.50
percent in this proceeding, combined with an equity ratio of 60.00 percent
provides the Company with a weighted average cost of equity of 4.28 percent.
Although staff is recommending a reduction to the Company’s ROE from the rate
that was authorized in its last rate case, SJNG’s equity ratio of 60.00 percent
provides the Company with a strong balance sheet and lower financial risk as
compared to other utilities operating in Florida. Therefore, staff believes an
ROE of 10.50 percent combined with an equity ratio of 60.00 percent is reasonable,
comports with the Hope and Bluefield requirements to set a fair
rate of return commensurate with returns set for other companies of comparable
risk, and will enable the Company to obtain the needed capital at reasonable
terms to provide adequate and reliable service to its consumers.
Based on the aforementioned, staff recommends an
authorized ROE of 10.50 percent for SJNG, with a range of plus or minus 100
basis points.
CONCLUSION
An authorized ROE of 10.50 percent, with a range of plus
or minus 100 basis points, should be approved for establishing SJNG’s projected
test year revenue requirement.
Issue 17:
What capital structure and weighted average cost of
capital should be approved for establishing SJNG’s projected test year revenue
requirement?
Recommendation:
The projected test year capital structure that
should be approved consists of 40.77 percent common equity, 27.18 percent long-term
debt, 1.54 percent customer deposits, 18.52 percent deferred taxes, and 11.99
percent for the Florida Coast Paper Company (FCPC) deferred credits. The
appropriate WACC that should be approved for establishing SJNG’s projected test
year revenue requirement is 6.58 percent. (Quigley, D. Buys)
Staff Analysis:
For the projected test year ending December 31,
2024, SJNG filed a revised capital structure consisting of 82.00 percent common
equity and 18.00 percent long term debt, based on investor sources. In Issue
15, staff recommends the Commission cap the equity ratio at 60.00 percent. When
reconciled to the rate base pro rata over all sources, the equity ratio decreased
to 40.77 percent, and the long-term debt ratio increased to 27.18 percent. In
addition to the investor sources of capital, the Company’s capital structure
also includes 1.54 percent of customer deposits, 18.52 percent of ADITs, and
11.99 percent of deferred credits related to the imputation of pre-paid revenue
for FCPC.
The 13-month average amounts reflect staffs recommended
amounts in Issues 12 through 15. As discussed in Issue 14, staff recommends a
cost rate for long-term debt of 8.36 percent. As discussed in Issue 16, staff
recommends an ROE of 10.50 percent. After these adjustments, a pro rata
adjustment is made over all sources of capital to reconcile the capital
structure to the rate base amount in Issue 11. The recommended capital
structure and WACC for establishing the revenue requirement is summarized in
Table 17-1.
Table 17-1
Staff Recommended Capital
Structure and WACC
|
Capital Component
|
Adjusted Amount
|
Ratio
|
Cost Rate
|
Weighted Cost
|
|
Common Equity
|
$1,325,612
|
40.77%
|
10.50%
|
4.28%
|
|
Long-Term Debt
|
$883,741
|
27.18%
|
8.36%
|
2.27%
|
|
Customer Deposits
|
$50,111
|
1.54%
|
2.00%
|
0.03%
|
|
ADITs
|
$602,050
|
18.52%
|
0.00%
|
0.00%
|
|
FCPC Deferred Credits
|
$389,771
|
11.99%
|
0.00%
|
0.00%
|
|
TOTAL
|
$3,251,285
|
100.00%
|
|
6.58%
|
Source: Staff
Analysis
The net effect of these adjustments is an increase in the
weighted average cost of capital from 6.05 percent as originally requested by
the Company to 6.58 percent. Based upon the proper components, amounts, and
cost rates associated with the capital structure for the test year ending
December 31, 2024, the projected test year capital structure that should be
approved for establishing SJNG’s projected test year revenue requirement is
6.58 percent.
CONCLUSION
The projected test year capital structure that should be
approved consists of 40.77 percent common equity, 27.18 percent long term debt,
1.54 percent customer deposits, 18.52 percent deferred taxes, and 11.99 percent
for the Florida Coast Paper Company (FCPC) deferred credits. The appropriate
WACC that should be approved for establishing SJNG’s projected test year
revenue requirement is 6.58 percent.
Issue 18:
Has SJNG made the proper adjustments to remove all
non-utility activities from projected test year net operating expenses,
including depreciation and amortization expense? If not, what adjustments
should be made?
Recommendation:
No. SJNG did not remove all non-utility activities
from projected test year net operating expenses. Staff recommends a decrease of
$14,393 to the projected test year operations and maintenance (O&M) expense
for non-utility activities, as well as a corresponding increase of $14,494 to
projected test year revenues. (Vogel)
Staff Analysis:
SJNG did not make the proper adjustments to remove
all non-utility activities from projected test year net operating expenses.
Staff found three items the Company included in its filing that need to be
addressed.
Property Insurance Expense
The Company noted an error in the calculation of property
insurance expense because it was estimated using 2017 data. When the Company
applied the 2023 allocation percentages, it reduced the actual 2023 amount to
$43,382 from $60,501. Therefore, the projected test year property insurance
expense should be reduced by $17,633.
Rental Income and Expense
SJNG recorded rental expense of $9,865 for the projected
test year. In response to staff’s fourth data request, dated September 23,
2024, SJNG stated that, “[o]ffice rental income from non-regulated divisions …
was omitted from the original MFRs filed and needs to be taken into account.”
The rental adjustments include rental income of $14,494 for one building and
additional rental expense of $3,240 from a different building. Both of these
buildings are shared locations and the adjusted amounts have correct
allocations.
Advertising Expense
SJNG included advertising expense of $1,276 for the
projected test year. Audit Finding No. 11 found advertising expenses of $1,454
in the 2023 base year. SJNG included in that amount an incorrect allocation for
a Chamber of Commerce expense, resulting in a reduction of $38. Staff also
noted that the Company failed to allocate a cost for promotional attire
totaling $735. To properly allocate that cost, staff recommends reducing this
cost by $100. Staff’s total reduction for advertising expense is $138. Staff’s
reductions result in a 2023 total expense of $1,316. Staff believes the Company
should properly allocate these expenses in the future, but does not recommend
an adjustment to the $1,276 expense included in the projected test year.
CONCLUSION
SJNG did not remove all non-utility activities from
projected test year net operating expenses. Staff recommends a decrease of
$14,393 to the projected test year O&M expense for non-utility activities,
as well as a corresponding increase of $14,494 to projected test year revenues.
Issue 19:
What is the appropriate amount of salaries and
benefits to include in the projected test year?
Recommendation:
The appropriate amount of projected salaries and
benefits that should be included in the test year is $769,803. (Vogel)
Staff Analysis:
SJNG included a salaries expense of $769,803 for the
projected test year. Audit staff verified the salaries and hours of all
regulated employees and did not have any findings. Staff sent additional data
request questions regarding the work hours, allocation methodology, and
employee count to verify that this level of salary is appropriate for the
Company.
Staff verified 2023 labor expenses of $724,588 for the
regulated utility and verified that the appropriate amount of allocations took
place for that year. Staff, therefore, has no allocation adjustments to make
for salaries expense.
SJNG used a compound multiplier, found on MFR Schedule
C-37, to justify the increased expenses from 2011. They take into account the
increased number of customers and the increase in consumer price index (CPI)
over the timeframe of 2011-2022. The calculations result in a multiplier of
1.3779. The Company then used this multiplier as a benchmarking tool to justify
the increases requested. For most expenses, the Company used the 2006 base year
to compare the benchmark to the requested expenses. The resulting calculations
present a matching problem as the multiplier does not include the years prior
to 2011, or the year 2023. Even with this discrepancy, the Company’s benchmark versus
requested comparisons show little variance.
In regard to SJNG’s salaries expense, SJNG includes a
comparison of CPI increases and salary increases from the years 2019-2022 on MFR
Schedule C-33. This comparison shows that the Company has not increased wages
at the same rate of CPI over that timeframe.
Staff does not believe the increase in salaries expense
seen since 2022 is unreasonable. Staff believes that the expenses were
allocated correctly and that the expenses have been reasonable based on
inflation increases in the years prior to the filing of the rate case.
Therefore, staff recommends no adjustments. Staff recommends including a
salaries expense of $769,803 for the projected test year.
CONCLUSION
Staff recommends no adjustments to salaries and benefits.
The appropriate amount of projected salaries and benefits that should be
included in the test year is $769,803.
Issue 20:
What amount of projected test year Rate Case Expense
should be approved? What amortization period should be used?
Recommendation:
The appropriate amount of rate case expense is $137,500.
This expense should be recovered over four years for an annual expense of $34,375.
The annual amortization expense should be increased by $14,875. (Vogel)
Staff Analysis:
In its MFRs, SJNG requested $137,500 for rate case
expense. Staff requested an update of the actual rate case expense incurred,
with supporting documentation, as well as the estimated amount to complete the
case. On October 18, 2024, the Company submitted its current invoices
supporting a portion of the requested rate case expense, which totaled $71,770.
They also provided a breakdown of the estimated expenses included in the filing
of $130,000 for legal expenses and $7,500 for CPA/other expenses.
Pursuant to Section 367.081(7), F.S., the Commission shall
determine the reasonableness of rate case expense and shall disallow all rate
case expense determined to be unreasonable. Staff has examined the requested
actual expenses, supporting documentation, and estimated expenses as listed
above for the current rate case. Based on its review, staff believes the
following adjustments to SJNG requested rate case expense are appropriate.
In its MFRs, SJNG included $130,000 in legal fees to
complete the rate case. In response to staff’s eighth data request, the Company
provided all current invoices for legal fees in relation to rate case expense
totaling $71,770. The Company stated that the rest of the estimated expense is
based off of a cost estimate provided by the attorney. Staff received an
updated estimated legal fee for the case of $130,000, which did provide more
detail as to how the amount was appropriate for the case. Staff believes this
estimate is sufficient and recommends legal fee expense of $130,000.
In its MFRs, SJNG included $7,500 in other expenses to
complete the rate case. In response to staff’s eighth data request, the Company
provided information that this expense was to cover the expenses of the CPA to
complete the rate case. The expense was calculated based on previous billings
from the CPA.
Based on the adjustments above, staff recommends that the
requested rate case expense of $137,500 be approved. In its MFRs, the Company
requested a total rate case expense of $137,500. When amortized over four
years, this represents an annual expense of $34,375. However, its original
filing reflected annual amortization expense of $19,500. In the Company’s
response to staff’s eighth data request, it stated that the amount of $19,500
was accidentally left in the MFRs from a previous filing. As such the net
increase in annual amortization expense should be $14,875.
CONCLUSION
The appropriate amount of rate case expense is $137,500.
This expense should be recovered over four years for an annual expense of
$34,375. The annual amortization expense should be increased by $14,875.
Issue 21:
What amount of projected test year O&M expenses
should be approved?
Recommendation:
Staff recommends a total O&M expense of
$1,548,893 for the projected test year. Staff, therefore, recommends an increase
of $51,072 to projected test year O&M expenses. (Vogel)
Staff Analysis:
SJNG reflected projected O&M expenses of $1,497,821
in its original filing. In addition to Issues 18 and 20, additional adjustments
are recommended.
The Company’s updated filing reflected an increase to
O&M expenses of $69,790. In addition to audit staff reviewing the updated
2023 O&M expenses, staff verified that the increase to the projected test
year reflected the same factors used in the Company’s original filing. The
updated O&M expenses requested is $1,567,611.
In addition to adjustments recommended in Issues 18 and 20,
staff recommends an additional adjustment to the Company’s Director Fees
expense. The regulated utility has been paying the full amount of Director Fees
prior to 2000 and has not been adjusted after the creation of the appliance and
propane divisions of the Company. The Company stated that the Director Fees are
only paid by the regulated operations because the Directors only operate as
directors for the regulated division of the Company. However, staff reviewed
the minutes of past Annual Meetings of Shareholders and Directors and found
that these meetings included discussion of all business of SJNG, including
non-regulated businesses. Therefore, staff recommends allowing only 36 percent
of the Director’s Fees, the same allocation as payroll, which would create a
reduction of $19,200 to O&M expense.
CONCLUSION
Staff recommends a total O&M expense of $1,548,893 for
the projected test year. Staff, therefore, recommends an increase of $51,072 to
projected test year O&M expenses.
Issue 22:
What amount of projected test year Depreciation and
Amortization Expense should be approved?
Recommendation:
The amount of Depreciation and Amortization Expense
that should be approved for the projected test year is $370,803. Based on
adjustments in Issues 6, 7, and 8, staff recommends a decrease in depreciation
expense of $3,246. (Vogel)
Staff Analysis:
The Company reflected Depreciation and Amortization
Expense of $374,049 for the projected test year in its original filing. Based
on adjustments in Issues 6, 7, and 8, staff recommends a decrease in
depreciation expense of $3,246. Staff recommends Depreciation and Amortization
Expense of $370,803 for the projected test year.
CONCLUSION
The amount of Depreciation and Amortization Expense that
should be approved for the projected test year is $370,803. Based on
adjustments in Issues 6, 7, and 8, staff recommends a decrease in depreciation
expense of $3,246.
Issue 23:
What amount of projected test year Taxes Other than
Income should be approved?
Recommendation:
The appropriate amount of Taxes Other Than Income (TOTI)
for the 2024 projected test year is $129,363. TOTI should be increased by
$1,000 for the projected test year. (Vogel)
Staff Analysis:
The Company recorded TOTI of $128,363 in its
original MFRs. In its supplemental MFRs the Company made an adjustment of
$41,990 to bring the total amount of TOTI to $170,353.
In its response to staff’s eighth data request, it
explained that the increase was due to Gross Receipts Tax expense being removed
from the calculation because it was not included in revenues. However, this
does not explain the increase in the expense, unless it was accounting for the
expense not included in the original filing. In Order No. PSC-01-1274-PAA-GU,
the Commission removed the Gross Receipts Tax embedded in base rates and
separately stated on customer bills.
As such, staff does not recommend increasing TOTI by $41,990 to reflect the Gross
Receipts Tax in the adjusted filing amount.
An additional fallout adjustment for regulatory assessment
fees (RAFs) is necessary based on the adjustments in Issues 4 and 18, resulting
in an increase of $1,000. As such, staff recommends TOTI of $129,363 for the
projected test year.
CONCLUSION
The appropriate amount of TOTI for the 2024 projected test
year is $129,363. TOTI should be increased by $1,000 for the projected test
year.
Issue 24:
What amount of projected test year Income Tax
Expense should be approved?
Recommendation:
The appropriate amount of projected test year Income
Tax Expense is $0. Projected Income Tax Expense should be decreased by $102,452.
(Vogel)
Staff Analysis:
SJNG reflected total income taxes for the test year
ending December 31, 2024 of $102,452, which was comprised entirely of deferred
tax expense. Based on the Company’s updated filing and staff’s Audit Finding
No. 9, this amount was an error and should be removed. No additional fallout
adjustments are necessary based on the negative net operating income reflected
in Issue 26, and accordingly, the income tax expense for the projected test
year should be $0. Staff’s recommended revenue increase in Issue 28 reflects the
multiplier in Issue 27, which reflects income tax expense on the revenue
increase.
CONCLUSION
The appropriate amount of projected test year Income Tax
Expense is $0. Projected Income Tax Expense should be decreased by $102,452.
Issue 25:
What amount of projected test year Total Operating
Expenses should be approved?
Recommendation:
The appropriate amount of Total Operating Expenses
in the projected test year should be $2,049,059. Total Operating Expenses
should be reduced by $76,915. (Vogel)
Staff Analysis:
SJNG included total operating expense of $2,125,974
in the test year. The Company updated its filing with a total operating expense
of $2,203,302.
In the Company’s original filing, it reflected a projected
test year amount of $23,289 labeled Interest Synchronization.” In its updated
filing, it increased this amount by $68,000, for a total of $91,289. Staff
believes this adjustment was made in error and is actually the interest expense
that is associated with the additional loans discussed in Issue 14. MFR
Schedule G-6 also describes it as interest expense. Interest expense on loans
is not included in Interest Synchronization and should be removed. Staff
recommends decreasing total operating expense by $23,289 to reflect the removal
of the projected test year amount in its original filing.
Based on the adjustments made in previous issues and the
adjustment to Interest Synchronization, staff is recommending a reduction of
total operating expenses of $76,915. Staff recommends a total operating expense
of $2,049,059 ($2,125,974 - $76,915) for the projected test year.
CONCLUSION
Staff recommends a Total Operating Expense of $2,049,059,
for the projected test year. Total Operating Expenses should be reduced by $76,915.
Issue 26:
What amount of projected test year Net Operating
Income should be approved?
Recommendation:
The appropriate amount of Net Operating Income in
the projected test year, prior to the rate increase, should be negative $479,274.
(Vogel)
Staff Analysis:
SJNG included a net operating income of negative $576,971
in the projected test year. Based on the adjustments in the previous issues,
staff recommends an increase in net operating income of $97,697 for the
projected test year. Staff recommends a net operating income of negative $479,274
for the projected test year.
CONCLUSION
Staff recommends a Net Operating Income of negative $479,274,
prior to the rate increase, for the projected test year.
Issue 27:
What revenue expansion factor and net operating
income multiplier should be approved for the projected test year?
Recommendation:
The appropriate revenue expansion factor and net
operating income multiplier is 74.058 percent and 1.3503, respectively. (Vogel)
Staff Analysis:
SJNG included a revenue expansion factor of 74.874 percent
in the filing. For the projected test year, the Company did not use the correct
state income tax factor of 5.5 percent. The corrected state income tax
decreases the revenue expansion factor to 74.058 percent. Staff recommends
including a revenue expansion factor of 74.058 percent and a net operating
income multiplier of 1.3503, for the projected test year.
Issue 28:
What annual operating revenue increase should be approved
for the projected test year?
Recommendation:
The appropriate annual operating revenue increase
for the projected test year should be $936,224. (Vogel)
Staff Analysis:
Based on staff adjustments made in all previous
issues, the appropriate annual operating revenue increase for the projected
test year should be $936,224. In its original filing, the Company’s MFRs reflected
a total increase $1,043,841. Based on its update to the 2023 intermediate test
year, SJNG’s request increased to $1,113,241.
Table 28-1
Revenue Increase
|
|
Company's Request
|
Staff Recommended
|
$ Decrease
|
% Decrease
|
|
Original Filing
|
$1,043,841
|
$936,224
|
($107,617)
|
10.3%
|
|
Updated Filing
|
$1,113,241
|
$936,224
|
($177,017)
|
15.9%
|
Issue 29:
What is the appropriate cost of service methodology
to be used in allocating costs to the rate classes?
Recommendation:
The appropriate cost of service methodology to be
used in allocating costs to the various rate classes is reflected in the cost
of service study contained in the MFRs. SJNG should file a revised cost of
service study, including rates and tariffs that reflect the Commission’s vote
on all issues by December 16, 2024, close of business. (Ward)
Staff Analysis:
The purpose of a cost of service study is to
allocate the approved total revenue requirement of the utility system among the
various rate classes. Then, base rates are designed to recover the total
revenue requirement attributable to that class. Base rates for SJNG include the
monthly fixed customer charge and the variable per-therm gas delivery service
rate, which are addressed in Issues 35 and 36, respectively. In rate design,
the fixed customer charge is typically determined first and represents a
portion of the overall rate requirement. The per-therm gas delivery service
rate is determined by taking the remaining revenue requirement, and dividing by
the projected therm volume of each rate class.
Witness Andy Shoaf stated that the standard methodology
traditionally used by Commission staff formed the principal basis of the cost
of service study. Traditionally, the Commission follows the practice of
gradualism, which limits the increase of each rate class to 1.5 times the
system average increase in revenue, including adjustment clauses. The practice
of gradualism, including limiting the increase to no greater than 1.5 times the
system average percentage increase in total, has been affirmed in several prior
Commission orders. However, SJNG is
proposing to increase revenues by 110.04 percent for the GS-2 rate class, which
is more than 1.5 times the system average. In response to staff’s fifth data
request, SJNG stated that it would agree to limit the increase to 1.5 times the
system total revenue increase as long as the revenue reduction in GS-2 is added
back to one or more other rate classes. SJNG’s proposed cost of service also
combined the RS-1 and RS-2 rate classes. As discussed in Issue 34, Staff
recommends approval of the rate class consolidation.
Based on the above, the appropriate cost of service
methodology to be used in allocating costs to the various rate classes is
reflected in the cost of service study contained in the MFRs. SJNG should file
a revised cost of service study, including rates and tariffs that reflect the
Commission’s vote on all issues by December 16, 2024, close of business.
Issue 30:
What are the appropriate customer charges?
Recommendation:
This is a fallout issue and will be addressed at the
rates agenda on January 7, 2025. (McClelland)
Staff Analysis:
This is a fallout issue and will be addressed at the
rates agenda on January 7, 2025.
Issue 31:
What are the appropriate per therm Gas Delivery
Service Rates?
Recommendation:
This is a fallout issue and will be addressed at the
rates agenda on January 7, 2025. (McClelland)
Staff Analysis:
This is a fallout issue and will be addressed at the
rates agenda on January 7, 2025.
Issue 32:
What are the appropriate miscellaneous service
charges?
Recommendation:
The appropriate miscellaneous service charges are
contained in Table 32-1 below. The Company should file a revised tariff sheet
to reflect returned charges as pursuant to Section 68.065, F.S. (Ward)
Staff Analysis:
The miscellaneous service charges are fixed charges
that are paid when a specified activity occurs, such as the initial connection of
a residence or business, a change of account, or a late payment. The
miscellaneous service charges are designed to recover the billing, personnel,
and other overhead costs associated with the specific charge.
Staff’s recommended miscellaneous service charges are
contained in the table below. The table also shows SJNG’s present and proposed
charges.
Table 32-1
SJNG Miscellaneous Service
Charges
|
Miscellaneous
Service Charges
|
Present
|
Proposed
|
Staff Recommended
|
|
Residential Connect
|
$40
|
$80
|
$80
|
|
Residential Reconnect
|
$40
|
$90
|
$90
|
|
Non-residential Connection and Reconnection
|
$60
|
$120
|
$120
|
|
Change of Account
|
$26
|
$66
|
$66
|
|
Late Payment
|
$3 or 1.5%
|
$13 or 1.5%
|
$13 or 1.5%
|
|
Returned Check
|
$25 or 5%
|
$35 or 5%
|
Pursuant to Section
68.065, F.S.
|
|
After Normal Business Hours Service
|
2x normal rate
|
2x normal rate
|
2x normal rate
|
Source: SJNG’s First Revised Tariff Sheets No. 27 and 28
The cost support for the increase in miscellaneous service
charges is shown in Schedule E-3 of the MFRs, and illustrates that the
increased rates are largely driven by increases in the cost of labor. As shown
in the table, staff recommends the same miscellaneous service charges as
proposed by SJNG except for the returned check charge. The Company proposed a
charge of $35 or 5 percent or whichever is greater. Section 68.065, F.S.
prescribes the appropriate assessment of charges for the collection of
worthless checks, or orders of payment. SJNG’s proposed minimum charge of $35
exceeds the amount allowed by statute. As currently set forth in Section
68.065(2), F.S., the following non-sufficient funds (NSF) charges may be
assessed:
1.
$25, if the face value does not exceed $50,
2.
$30, if the face value exceeds $50 but does not exceed
$300,
3.
$40, if the face value exceeds $300,
4.
or five percent of the face amount of the check,
whichever is greater.
In order to be consistent with the statute, staff
recommends that the returned check charges be consistent with Section 68.065,
F.S.
Based on the above, the appropriate miscellaneous service
charges are contained in Table 32-1. The Company should file a revised tariff
sheet to reflect returned charges as pursuant to Section 68.065, F.S.
Issue 33:
Should the new Realtor Inspection Charge be approved?
Recommendation:
Yes, the new Realtor Inspection Charge of $105
should be approved. (Ward)
Staff Analysis:
SJNG proposed a new Realtor Inspection Charge of
$105 for service activated for less than seven days for the sole purpose of an
inspection to facilitate a real estate transaction. Pursuant to Rule 25-7.057,
F.A.C., in the case of temporary service for short-term use, the Company may
require the customer to pay all costs of making the service connection and
removing the material after service has been discontinued, or to pay a fixed
amount in advance to cover such expense; provided, however, that the customer
shall be credited with reasonable salvage realized by the Company when service
is terminated.
In response to staff’s fifth data request, SJNG stated
that it has been using the existing $40 connection charge for realtor
inspections and classifying them as the same. SJNG also provided cost support
for the Realtor Inspection Charge similar to a Schedule E-3 included in the
MFRs. The cost support provided illustrates that the charge includes costs for
both the initial connection and for a second trip to lock off the meter at the
site to discontinue service. The Company additionally clarified that whoever
requests the service is responsible for the charge. Staff believes the
requested charge is reasonable and consistent with the rule. Based on the
above, staff recommends that the new Realtor Inspection Charge of $105 should
be approved.
Issue 34:
Is SJNG’s proposal to combine the RS-1 class into
RS-2 class appropriate?
Recommendation:
SJNG’s proposal to combine the RS-1 class into RS-2
is appropriate and should be approved. SJNG should file revised energy
conservation cost recovery (ECCR) factors and associated ECCR tariffs based on
the two residential rate classes, for Commission approval at the rates agenda
on January 7, 2025. (McClelland)
Staff Analysis:
During its 2008 rate proceeding, the Commission
approved SJNG’s request to stratify its residential rate structure into three
classes: RS-1, with an annual usage of less than 150 therms, RS-2, with an
annual usage of 150-299 therms, and RS-3, with an annual usage of over 300
therms. However, in this rate
proceeding, SJNG has proposed to consolidate its RS-1 and RS-2 rate classes due
to similarity in usage and to improve administrative efficiency. Witness Stuart
Shoaf explained that “with experience over time since the last rate case, the
Company reached the conclusion that the stratification in its existing
residential class is not warranted or practical.” In addition, witness Stuart
Shoaf indicated the year-to-year revising of customers between the RS-1 and RS-2
rate classes based on relatively marginal changes in usage created
administrative inefficiencies.
The proposed restructuring would leave SJNG with
stratification over two rate classes, RS-2 and RS-3. The proposed RS-2 class
will be available to customers who use less than 300 therms annually. The RS-3
class would continue to be available for customer who use over 300 therms
annually. Staff believes this change is reasonable and appropriate because it
minimizes administrative inefficiencies due to shifting customers between RS-1
and RS-2.
Reducing the stratification to the residential classes
will have an impact on the ECCR factors determined in the 20240004-GU docket
due to the timing of the final rates in this proceeding. The Commission approved ECCR factors for the
RS-1, RS-2, and RS-3 rate classes at the November 5, 2024 ECCR hearing. The
currently approved ECCR factors differ for the three residential rate classes.
If the Commission approves the reduction of stratification to two residential
rate classes, SJNG should be required to file recalculated ECCR factors, to
reflect the combined RS-1 and RS-2 rate classes, for Commission approval at the
subsequent rates agenda. The revised ECCR factors should be filed in the
20240004-GU ECCR docket.
Based on the above, SJNG’s proposal to combine the RS-1
class into RS-2 is appropriate and should be approved. SJNG should file revised
tariffs to reflect the appropriate ECCR factors based on the two residential
rate classed for Commission approval. The revised ECCR factors should be effective
concurrent with the effective date of revised base rates in this proceeding.
Issue 35:
Should the Commission give staff administrative
authority to approve tariffs reflecting Commission-approved rates and charges?
Recommendation:
This is a fallout issue and will be addressed at the
rates agenda on January 7, 2025. (McClelland)
Staff Analysis:
This is a fallout issue and will be addressed at the
rates agenda on January 7, 2025.
Issue 36:
What is the effective date for SJNG's revised rates
and charges?
Recommendation:
This is a fallout issue and will be addressed at the
rates agenda on January 7, 2025. (Ward)
Staff Analysis:
This is a fallout issue and will be addressed at the
rates agenda on January 7, 2025.
Issue 37:
Should any portion of the interim increases granted
be refunded to the customers?
Recommendation:
No. The proper refund amount should be calculated by
using the same data used to establish final rates, excluding rate case expense
and other items not in effect during the interim period. This revised revenue
requirement for the interim collection period should be compared to the amount
of interim revenues granted. Based on this calculation, no refund is
required. Further, upon issuance of the
final order in this docket, the corporate undertaking should be released. (Vogel)
Staff Analysis:
By Order No. PSC-2024-0379-PCO-GU, issued August 19,
2024, the Commission authorized the collection of interim rates, subject to
refund, pursuant to Section 366.071, F.S. The approved interim revenue
requirement for SJNG was $2,196,392. The interim collection period is September
2024 through January 2025.
According to Section 366.071, F.S., adjustments made in
the rate case test period that do not relate to the period interim rates are in
effect should be removed. Rate case expense is an example of an adjustment
which is recovered only after final rates are established.
In this proceeding, the test period for establishment of
interim rates is the 12-month period ended December 31, 2023. FPUC’s approved
interim rates did not include any provisions for pro forma or projected
operating expenses or plant. The interim increase was designed to allow
recovery of actual interest costs, and the lower limit of the last authorized
range for return on equity.
To establish the proper refund amount, staff has
calculated a revised interim revenue requirement utilizing the same data used
to establish final rates for the 2024 projected test year. Items, such as rate
case expense, were excluded because these items are prospective in nature and
did not occur during the interim collection period. Using the principles
discussed above, because the revenue requirement, granted in Order No. PSC-2024-0379-PCO-GU,
for the December 2023 interim test year is less than the revenue requirement of
$2,374,319, staff recommends that no refund is required. Further, upon issuance
of the final order in this docket, the corporate undertaking should be
released.
CONCLUSION
The proper refund amount should be calculated by using the
same data used to establish final rates, excluding rate case expense and other
items not in effect during the interim period. This revised revenue requirement
for the interim collection period should be compared to the amount of interim
revenues granted. Based on this calculation, no refund is required. Further,
upon issuance of the final order in this docket, the corporate undertaking
should be released.
Issue 38:
Should SJNG be required to establish and maintain a
Cost Allocation Manual (CAM)?
Recommendation:
Yes. SJNG should be required to establish and
maintain a CAM. The Company should be required to file its CAM with the
Commission, in Docket No. 20240046-GU, by December 31, 2025. (Vogel)
Staff Analysis:
SJNG operates natural gas, propane gas, and appliance
businesses. As noted by Audit Finding No. 1, the Company provided how some
costs are allocated between its three businesses, but it does not have a
written CAM. This results in a lack of consistency and clarity in the Company’s
allocation policies and procedures. This posed many difficulties in staff’s
review of SJNG’s filing.
Section 366.05(9), F.S., provides that the Commission may
require the filing of reports and other data by a public utility or its
affiliated companies, including its parent company, regarding transactions, or
allocations of common costs, among the utility and such affiliated companies.
The Commission may also require such reports or other data necessary to ensure
that a utility’s ratepayers do not subsidize nonutility activities.
Staff recommends that the Commission require SJNG to
establish and maintain a CAM, as it is now involved in nonregulated activities.
Additionally, this would facilitate the rate case process in a subsequent
proceeding. The CAM should show whether transactions involve regulated or
nonregulated products or services, and be organized and indexed so that the
information contained therein can be easily accessed. The Company should be
required to file its CAM with the Commission, in Docket No. 20240046-GU, by
December 31, 2025.
CONCLUSION
For the reasons outlined above, SJNG should be required to
establish and maintain a CAM. The Company should be required to file its CAM
with the Commission, in Docket No. 20240046-GU, by December 31, 2025.
Issue 39:
Should SJNG be required to file, within 90 days
after the date of the final order in this docket, a description of all entries
or adjustments to its annual report, rate of return reports, and books and
records which will be required as a result of the Commission’s findings in this
rate case?
Recommendation:
Yes. SJNG should be required to file, within 90 days
after the date of the final order in this docket, a description of all entries
or adjustments to its annual report, rate of return reports, and books and
records which will be required as a result of the Commission’s findings in this
rate case. (Gatlin)
Staff Analysis:
Yes. SJNG should be required to file, within 90 days
after the date of the final order in this docket, a description of all entries
or adjustments to its annual report, rate of return reports, and books and
records which will be required as a result of the Commission’s findings in this
rate case.
Issue 40:
Should this docket be closed?
Recommendation:
This docket should remain open for the Commission to
determine the final rates at a subsequent Commission Conference. (Dose, Farooqi)
Staff Analysis:
This docket should remain open for the Commission to
determine the final rates at a subsequent Commission Conference.
